Roadmap to a Comprehensive Supply Management Strategy

Is your company getting the most from its supply management function? Here's a step-by-step look at how to phase in a successful "end-to-end" supply management strategy.


Another challenge is that attempts to change corporate purchasing behavior when business units are measured on parochial performance metrics generally fail. Employees continue to book air-travel segments from "discount" Internet sites, believing that they are saving their departments or company money. The business-unit-focused metrics obscure the fact that the loss of volume for the preferred carrier will result in the loss of (much larger) back-end rebates that would accrue if the predicted volumes were reached.

From an organizational perspective, there is also no way to effectively control spend, due to the distributed nature of the procurement function and the lack of enforcement of policies and guidelines that authorize employees to make purchases. Everybody seems to be authorized to commit corporate spend to external parties. When lacking a control mechanism there is no way to stem the "leakage," and therefore no way to apply a "cash tourniquet" during short periods of economic downturn.

The challenges described above touch on just a few of the problems that the senior procurement executive faces. That executive needs a broad, comprehensive plan that will outline the organizational structures, business processes and procurement programs that will comprise the supply management strategy. The procurement executive also needs to institutionalize that strategy to stem the flow of bad buying, reduce the number of suppliers, and ensure that the company is paying the right price (not necessarily the lowest price) for everything that is purchased, passing the savings along as increased shareholder value.

While individual initiatives can have a positive effect, the greatest benefits occur when addressing the entire breadth of the supply management function. What follows is a phased approach to implementing an "end-to-end" supply management strategy.

Build the Foundation

In order to lay the groundwork for a truly end-to-end supply management strategy, first start by categorizing both materials and suppliers. Material categories are designations for every purchased item that describe both the strategic value of that material to the organization and the sourcing complexity of that material. This often takes the form of a matrix. Common designations are Commodity (or Commercial-off-the-shelf (COTS)), Special (or Custom) and Unique. The matrix may also carry the designation of material usage (Indirect, Direct or Service).

Supplier categories are designations for every supplier from which a company buys material that describe the nature of the relationship the organization has with that supplier. Suppliers can be Commodity suppliers (suppliers of commodity or COTS items); Operational suppliers (of key, but not unique, materials); or Strategic suppliers (suppliers with which there is a true symbiotic relationship).

Next, document the company's primary procurement processes to understand where process improvements may be made or where automation efforts may be launched. Inventory the information systems in which spend data may be found, considering both internal and external systems. Internal systems may include accounts payable, purchasing, general ledger, manufacturing, materials resource planning (MRP) and ERP. External systems include bank wire transfers, credit card and procurement card systems, foreign currency transfer mechanisms, and freight payment systems.

Then perform a comprehensive analysis of enterprise-wide spend. This is the foundation on which numerous procurement initiatives rest.

The next step is to establish baseline cash metrics of key performance indicators, including cash-to-cash cycle time, inventory days of supply, return on working capital, and current and historical cost by commodity. In this way, a variety of procurement initiatives may be measured, and the value to the organization of the supply management function may be communicated.

Finally, the structure of the organization should be designed to enforce the concept of the authorized buyer, a class of employee authorized to commit corporate funds to external suppliers. The role of authorized buyer includes specification of allowable commodity classes and spending limits by commodity. Often these boundaries are enforced through a comprehensive P-card program. Once you select the organization's authorized buyers it will be easier to enact such enterprise-wide initiatives as a spending freeze or to foster the behavior that will increase utilization of global contracts and reduce maverick spend.

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